Standard & Poor's Ratings Services currently rates 41 sovereigns in the Europe region, and has compiled the key quantitative features underlying our assumptions for 2007 for all these issuers. Overall, economic growth is set to slow somewhat in most of these countries in 2007, but to remain at healthy levels. Fiscal balances will continue to improve marginally, but by less than might be expected given the robust growth environment.
A wider selection of economic indicators can be consulted at the recently published
"Sovereign Risk Indicators" for 113 sovereigns rated by Standard & Poor's, which is published semiannually in January and July. A commentary comparing sovereign rankings globally titled
"Sovereign Risk Indicators: 2007 Outliers," was also published on Jan. 17, 2007, on RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis.
Robust Growth In Eastern Europe, Eurozone Limping Behind
In many European countries, 2006 has proved to be more benign in terms of economic growth and fiscal outcomes than had been expected at the beginning of the past year. For 2007, Standard & Poor's expects that the growth dynamics will remain robust, with a weighted growth rate across the 41 rated sovereign of 2.7%, after 3.2% in 2006, which itself was well short of the 2000 record of 4.1% (see table 1). As in previous years, the relatively less prosperous Central and East European (CEE) sovereigns lead the way. The most dynamic economy in 2007 will be Latvia, with GDP growth of 8.9%, with neighboring Estonia coming in second (for official names and credit ratings, see table 1). Slovakia will enter the top three for the first time in 2007, underlining its turnaround since 2000, when it was the most sluggish economy of rated Europe. Only three (small) Eurozone members make it into the top 20, Ireland at 10 (5.3%), Luxembourg at 18 (4.3%) and new member Slovenia at 19 (4.2%).
Table 1
European Sovereigns Real GDP Growth
(%)
Long-term foreign currency rating
2000
Rank
2006
Rank
2007
Rank
Latvia (Republic of)
A-
6.9
7
11.0
2
8.9
1
Estonia (Republic of)
A
7.9
5
11.0
1
7.5
2
Slovak Republic
A
0.7
40
7.5
5
7.2
3
Lithuania (Republic of)
A
4.1
23
7.9
4
7.0
4
Georgia (Government of)
B+
2.1
39
8.0
3
6.4
5
Bulgaria (Republic of)
BBB+
5.4
13
6.0
9
6.2
6
Romania (Republic of)
BBB-
2.2
38
7.5
5
6.0
7
The Russian Federation (Russia)
BBB+
10.0
1
7.0
7
6.0
7
Serbia (Republic of)
BB-
5.2
15
5.9
10
5.6
9
Ireland (Republic of)
AAA
9.2
2
5.4
13
5.3
10
Turkey (Republic of)
BB-
7.4
6
5.3
14
5.2
11
Ukraine
BB-
5.9
11
6.3
8
5.0
12
Poland (Republic of)
BBB+
4.0
25
5.2
15
4.7
13
Czech Republic
A-
3.9
27
5.8
11
4.7
14
Croatia (Republic of)
BBB
2.9
36
4.5
20
4.5
15
Macedonia (Republic of)
BB+
4.6
20
4.0
24
4.5
15
Isle of Man
AAA
8.1
4
4.3
21
4.3
17
Luxembourg (Grand Duchy of)
AAA
8.5
3
5.5
12
4.3
18
Slovenia (Republic of)
AA
4.6
19
4.8
16
4.2
19
Montenegro (Republic of)
BB
N/A
N/A
4.6
19
4.0
20
Cyprus (Republic of)
A
5.1
17
3.8
26
3.8
21
Spain (Kingdom of)
AAA
5.0
18
3.7
27
3.4
22
Hellenic Republic (Greece)
A
4.5
21
4.0
23
3.4
23
Sweden (Kingdom of)
AAA
4.3
22
4.1
22
3.3
24
Andorra (Principality of)
AA
5.3
14
3.2
28
3.0
25
Netherlands (State of The)
AAA
3.5
30
3.0
31
2.9
26
Finland (Republic of)
AAA
5.1
16
4.6
17
2.9
27
Austria (Republic of)
AAA
3.4
32
3.2
29
2.7
28
United Kingdom
AAA
3.8
28
2.6
35
2.5
29
Liechtenstein (Principality of)
AAA
3.3
33
3.1
30
2.5
30
Hungary (Republic of)
BBB+
6.0
10
4.0
25
2.4
31
Belgium (Kingdom of)
AA+
3.9
26
2.7
33
2.3
32
Denmark (Kingdom of)
AAA
6.2
9
2.7
33
2.2
33
Malta (Republic of)
A
6.4
8
2.3
37
2.1
34
Norway (Kingdom of)
AAA
3.0
35
2.1
39
2.0
35
France (Republic of)
AAA
4.1
24
2.3
38
1.9
36
Swiss Confederation (Switzerland
AAA
2.7
37
2.9
32
1.9
36
Germany (Federal Republic of)
AAA
3.2
34
2.5
36
1.8
38
Portugal (Republic of)
AA-
3.4
31
1.0
41
1.2
39
Italy (Republic of)
A+
3.6
29
1.8
40
1.2
40
Iceland (Republic of)
A+
5.7
12
4.6
18
(0.3)
41
Weighted Average
4.1
3.2
2.7
N/A--Not applicable.
Only one sovereign is projected to suffer a recession next year: Iceland, where the economy is correcting following an unprecedented credit and investment boom. Iceland will thus take over the bottom position from Portugal, which occupied the space in 2006 with growth of around 1%. Iceland is also the sovereign where growth rates drops most compared to 2006 (by 4.9 percentage points), ahead of Estonia (3.5 points), Latvia (2.1 points), and Finland (1.7 points). Growth in 2007 is expected to accelerate only in three European economies: Macedonia, Bulgaria, and Portugal, although the latter remains firmly anchored near the bottom of the European growth league. Half of the bottom 10 in the growth league are Eurozone members, including the heavyweights France (at 36 with 1.9%), Germany (38 with 1.4%) and Italy (40 with 1.2%), which account for a combined 42% of GDP of rated European sovereigns (down from 46% in 2000).
Easy Credit To Remain A Driver Of Growth
When it comes to the question of what is fuelling the relatively robust growth experience in Europe, a credit boom plays a vital role in many countries. Domestic credit had risen to 114% of GDP in 2006, from 98% in 2000. This year the ratio is to climb further to 117% of GDP (see table 2). Indeed, European sovereigns make up seven of the top 10 places in the world in terms of depth of credit intermediation, led by Luxembourg, where the vast majority of credit is for clients outside the Grand Duchy, granted by Luxembourg-based subsidiaries of foreign banks. The contingent liability for the state in the event of a systemic banking crisis is therefore very limited. Iceland, Andorra (where the case is similar to Luxembourg), and Ireland all boast credit ratios in excess of 200% of GDP and are, together with Luxembourg, the top four not only in Europe but worldwide. Iceland's credit ratio has risen almost threefold since 2000, climbing the global ranking by 23 places. Other European sovereigns (Spain, Ireland, the Baltic and Balkan regions) have experienced a comparable or even faster rise in the global rankings. As a result, residential property prices have also reached unprecedented levels in many of the above-mentioned countries.
Table 2
European Sovereigns Domestic Credit
(% of GDP)
Long-term foreign currency rating
2000
Rank
2006
Rank
2007
Rank
Luxembourg
AAA
447.6
1
489.2
1
472.7
1
Iceland
A+
100.0
15
270.8
2
275.8
2
Andorra
AA
159.7
3
245.8
3
268.7
3
Ireland
AAA
106.0
12
191.0
4
213.9
4
Netherlands
AAA
141.0
4
184.6
5
189.9
5
Denmark
AAA
135.4
5
174.4
6
177.8
6
U.K.
AAA
132.7
6
171.2
7
177.5
7
Spain
AAA
88.7
17
156.5
9
174.1
8
Switzerland
AAA
161.0
2
169.2
8
171.8
9
Portugal
AA-
131.3
7
150.4
10
152.9
10
Liechtenstein
AAA
103.2
13
141.8
11
142.6
11
Norway
AAA
126.4
8
134.4
12
135.2
12
Sweden
AAA
96.5
16
126.7
13
130.9
13
Malta
A
107.1
11
119.6
14
120.5
14
Cyprus
A
113.0
10
117.6
15
117.6
15
Austria
AAA
101.7
14
115.7
16
116.3
16
Germany
AAA
118.6
9
111.7
17
113.0
17
Italy
A+
76.0
19
96.5
18
101.9
18
Greece
A
53.6
23
92.7
19
101.0
19
France
AAA
72.5
20
81.0
20
81.7
20
Latvia
A-
18.3
32
72.9
23
79.8
21
Finland
AAA
54.0
22
78.3
21
79.2
22
Estonia
A
24.2
30
70.9
24
77.1
23
Belgium
AA+
79.5
18
75.0
22
74.9
24
Croatia
BBB
38.8
26
70.5
25
74.2
25
Slovenia
AA
35.8
27
59.6
26
67.5
26
Bulgaria
BBB+
12.6
35
48.0
28
54.8
27
Hungary
BBB+
32.0
28
52.7
27
51.7
28
Ukraine
BB-
12.3
36
42.6
29
49.4
29
Lithuania
A
12.1
37
41.8
30
43.9
30
Czech Republic
A-
49.9
25
39.1
31
39.5
31
Slovak Republic
A
51.0
24
36.5
32
36.5
32
Russia
BBB+
14.4
34
30.5
33
36.3
33
Macedonia
BB+
18.1
33
29.3
34
33.0
34
Serbia
BB-
57.6
21
28.7
35
31.2
35
Turkey
BB-
23.3
31
26.8
38
30.6
36
Montenegro
BB
N/A
N/A
27.3
37
30.4
37
Romania
BBB-
9.3
38
25.1
39
29.8
38
Poland
BBB+
27.3
29
27.9
36
28.2
39
Georgia
B+
8.0
39
21.5
40
21.4
40
Isle of Man
AAA
N/A
N/A
N/A
N/A
N/A
N/A
Weighted Average
97.9
113.6
117.0
N/A--Not applicable.
In 2007 there will be 19 sovereigns in Europe where outstanding credit will surpass GDP, up from 17 in 2006. In 10 countries (Latvia, Bulgaria, Ukraine, Lithuania, Estonia, Romania, Iceland, Georgia, Russia, and Ireland) the ratio has doubled since 2000, with a more than threefold i
